OECD: Preventing treaty abuse (BEPS Action 6) | KPMG | GLOBAL

OECD: Recommendations on preventing treaty abuse (BEPS Action 6)

OECD: Preventing treaty abuse (BEPS Action 6)

The Organisation for Economic Co-operation and Development (OECD) released its 2014 deliverable on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) under the base erosion and profit shifting (BEPS) Action Plan as part of a release that included six other reports addressing other aspects of the BEPS Action Plan.


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Read BEPS Action 6 on the OECD website.


The proposed changes to the OECD Model Tax Convention presented in the recommendations (BEPS Action 6 deliverable) reflect the agreement of the delegates of the OECD member countries and G20 countries that states incorporate in their treaties sufficient safeguards to prevent treaty abuse, including treaty shopping.

Given the variety of approaches to limit treaty shopping, the BEPS Action 6 deliverable recommends alternative model provisions that may be adapted based upon the specificities of individual countries and the circumstances of the negotiation of bilateral treaties.

The BEPS Action 6 deliverable recognizes that further work is needed with respect to the precise contents of the model provisions and related commentary, in particular the limitation on benefits (LOB) rule and the policy considerations relevant to treaty entitlement of collective investment vehicles (CIVs) and non-CIV funds.

Changes from the BEPS Action 6 discussion draft

The BEPS Action 6 deliverable differs from the Action 6 Discussion Draft in several respects. 

First, the BEPS Action 6 deliverable recommends at a minimum the inclusion in a tax treaty ofeither:

  • A general anti-abuse rule designed to address forms of treaty abuse (a “principal purpose test” (PPT)) or
  • A comprehensive “limitation on benefits” (LOB) rule supplemented by a mechanism (e.g., a restricted PPT rule applicable to conduit financing arrangements or domestic anti-abuse rules or judicial doctrines that would achieve a similar result) that would deal with conduit arrangements not already dealt with in tax treaties
Second, the proposed LOB rule includes a place-holder allowing for the contracting states to negotiate a provision specific to resident CIVs and non-CIV funds.
Third, the proposed LOB rule in the BEPS Action 6 deliverable includes a “derivative benefits” provision that allows certain entities owned by residents of other countries / states to obtain treaty benefits that these residents would have obtained if they had invested directly.
Next, the BEPS Action 6 deliverable proposes the OECD Model Tax Convention and the Commentary thereunder be amended to confirm a country’s / state’s right to impose exit taxes on, for example, deferred income when a resident ceases to be a resident of that country.
Last, after having requested comments on a minimum shareholding period in the Action 6 Discussion Draft, the BEPS Action 6 deliverable adopts a one-year minimum shareholding period be met before a corporate resident shareholder owning directly stock representing at least 25% of the voting power in a distributing corporation resident in the other country / state may benefit from 5% rate of source country dividend withholding tax.

KPMG observation

The BEPS Action 6 deliverable’s recommendation to allow states the ability to choose between the PPT and the LOB rule supplemented by domestic anti-abuse rule appears to be a significant improvement from the Action 6 Discussion Draft which recommended the inclusion of both the LOB rule and general anti-abuse rule (in the form of a PPT). As a PPT and / or main purpose test may be viewed as subjective, vague, and adding uncertainty to a treaty, this is expected to be viewed as a welcomed change.

Also, the committment to address whether CIVs and non-CIV funds are qualified persons will be appreciated by those states that have a large number of CIVs and non-CIV funds investing in cross-border stocks and securities on behalf of residents of third states.


For more information, contact a KPMG tax professional:

Manal Corwin | +1 (202) 533-3127 | mcorwin@kpmg.com

Jason Connery | +1 (202) 533-6370 | jconnery@kpmg.com

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